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Local risk-minimization for Barndorff-Nielsen and Shephard models with volatility risk premium

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  • Takuji Arai

Abstract

We derive representations of local risk-minimization of call and put options for Barndorff-Nielsen and Shephard models: jump type stochastic volatility models whose squared volatility process is given by a non-Gaussian rnstein-Uhlenbeck process. The general form of Barndorff-Nielsen and Shephard models includes two parameters: volatility risk premium $\beta$ and leverage effect $\rho$. Arai and Suzuki (2015, arxiv:1503.08589) dealt with the same problem under constraint $\beta=-\frac{1}{2}$. In this paper, we relax the restriction on $\beta$; and restrict $\rho$ to $0$ instead. We introduce a Malliavin calculus under the minimal martingale measure to solve the problem.

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  • Takuji Arai, 2015. "Local risk-minimization for Barndorff-Nielsen and Shephard models with volatility risk premium," Papers 1506.01477, arXiv.org.
    • Handle: RePEc:arx:papers:1506.01477
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    References listed on IDEAS

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    1. Jouini,E. & Cvitanic,J. & Musiela,Marek (ed.), 2001. "Handbooks in Mathematical Finance," Cambridge Books, Cambridge University Press, number 9780521792370, September.
    2. Ole E. Barndorff‐Nielsen & Neil Shephard, 2001. "Non‐Gaussian Ornstein–Uhlenbeck‐based models and some of their uses in financial economics," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 63(2), pages 167-241.
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